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The Fed and Politics: What Investors Should Know

2025-07-21

Recent tensions between the White House and Federal Reserve have brought the topic of Fed independence into focus. This is because there can be a natural friction between elected officials and the Fed since they each have unique goals and incentives.

For instance, the President and Congress often prefer lower interest rates to spur economic growth and help fund the federal budget. In contrast, the Fed may need to make difficult choices around issues such as inflation and financial stability, based on longer-term considerations.

The Fed is not without its critics, and there are countless history books detailing both the successes and failures of different Fed chairs. Still, Fed independence has been an important aspect of the financial system for decades. Today, much of the discussion on this topic centers around the legality of whether the President can fire a sitting Fed chair, the mechanics of what happens in that situation, and speculation over who would be nominated next.

However, what truly matters for investors is whether monetary policy remains appropriate and the economy remains stable. Regardless of how the administration chooses to act, Jerome Powell’s term as Fed Chair will end by May 2026. What do investors need to consider in the coming years regarding the Fed?

Fed independence has evolved throughout its history

The accompanying chart shows the nine Fed chairs appointed since 1948. Nearly all served under presidents of both parties, including re- ominations by other presidents. Jerome Powell, for instance, was originally nominated by President Trump in 2017, and was confirmed for a second term under President Biden. This chart also makes it clear that the economy has grown under different Fed chairs nominated by each party.

The concept of Fed independence is often taken for granted; so, it’s helpful to briefly understand its history. As the country's central bank, the Fed sets monetary policy and oversees the stability of the financial system. Independence means the Fed is free from political pressure, allowing it to make decisions based only on the economy and financial system.

This independence has developed over time. The Fed was not established by the Constitution, but rather by the Federal Reserve Act of 1913 passed by Congress. The Fed has a dual mandate which has also evolved over time, and is often interpreted as a) maintaining low unemployment, and b) an inflation target of 2%. Thus, the way monetary policy is conducted today is influenced by historical economic events including recessions and inflationary periods.

Following the Great Depression, the Banking Act of 1935 restructured the Fed, centralizing power within the Board of Governors and removing the Treasury Secretary from the Board to reduce political influence. During World War II, the Fed surrendered some independence by maintaining low interest rates to help finance the war effort. This continued until the 1951 Treasury-Fed Accord, which is widely regarded as re-establishing Fed independence by ending its obligation to support government bond prices.

The inflation and policy environment remains complex

Perhaps the best parallel to today’s environment is the 1970s and early 1980s. Ahead of the 1972 election, President Nixon sought to ensure that easy monetary policy would support his campaign. Fed Chair Arthur Burns, who had been Nixon's economic advisor, accommodated this by loosening monetary policy, which economists believe contributed to the inflationary pressures of the following decade.¹

It wasn’t until the early 1980s, under Paul Volcker, that the Fed regained control of inflation by causing a recession. While most economists agree this is what ended the “stagflation” of that period, it came with political challenges. In his memoir, Volcker recounted pressure from the Reagan administration to not raise rates before an election.²

In many ways, today’s economic environment echoes that of the 1970s since there are tensions between holding higher rates to help reduce current inflation and lower future inflation expectations, and lowering rates to spur growth. While inflation has been trending closer to the Fed's 2% target, headline CPI remains at 2.7% and core inflation at 2.9% according to the latest report. Additionally, the Fed is taking a “wait-and-see” approach on whether tariffs will raise prices for consumers as is generally expected.

One way to understand this challenge is via the money supply, shown in the chart above. The money supply, which is managed by the Fed, typically increases steadily, supporting both stable growth and inflation. During crisis periods, such as in 2020, the money supply is used to support the economy by injecting liquidity into the system with Fed Open Market bond purchases. Adding so much liquidity can be helpful in the short run but result in adverse inflationary pressures later. However, money supply growth has been flat in recent years as policymakers focused on combating inflation. Naturally, this can conflict with what some elected officials might prefer.

The Fed is still expected to cut rates

Politics aside, the Fed is expected to cut rates further this year. It has been on hold following several cuts in late 2024 due to uncertainty around tariffs. The reality is that Fed policy exists to support long-term growth trends. When the economy is strengthening, the Fed's job is to make sure it does not overheat – sometimes described as “taking the punch bowl away.” When the economy is weak, lower rates may be needed to jumpstart growth.

This balancing act is challenging, even in the best of times. In hindsight, the Fed is often accused of being “behind the curve.” For instance, Alan Greenspan, who served as Fed Chair for nearly 20 years, did not properly react to the housing bubble forming at the end of his tenure. More recently, some argue that the Fed raised rates too slowly in 2022 when there was already clear evidence of inflation

What matters for investors and their portfolios is not to debate what the Fed should or should not have done. Instead, it’s to respond properly to the current investment environment with a longterm plan. History shows that changes in Fed leadership and shifts in policy can create uncertainty, but markets have performed well in spite of these challenges.

The bottom line? The market and economy have performed well under many different monetary policy and political environments. Maintaining a long-term plan that can navigate this uncertainty is still the best way to achieve financial goals.

As unsettling as unexpected changes may be, the markets generally adapt to whatever is the "new normal". So, an unexpected change in Fed leadership will most likely result in a swift reaction with increased volatility. But whether the "new normal" comes into focus in a few days, weeks, or months, investors should expect that things will level off.

In the meantime, investors can mitigate the potential for market volatility by allocating a portion of their equity portfolio to "buffer" or defined-outcome ETFs. To combat the potential adverse impact of inflation, investors should continue to allocate to US Treasury Inflation-Protected Securities (TIPS) and commodities like gold.

https://www.aeaweb.org/articles?id=10.1257/jep.20.4.177
Volcker, P. A. (2018). Keeping At It: The Quest for Sound Money and Good Government

Information provided in these materials has been drawn from resources deemed reliable. Clear View Wealth Advisors, LLC ("RIA firm") and Steve Stanganelli, CFP(r) ("Advisor") may provide additional commentary accompanying the materials. Any commentary by the source materials may differ from opinions expressed by the Advisor or RIA firm. Commentary and opinions of the Advisor and RIA firm are provided in good faith.

Chart books, newsletters, and related materials are distributed for general informational and educational purposes only and are not intended to constitute legal, tax, accounting or investment advice. All investments involve risk, including loss of principal, and past performance of a security, cryptocurrency, financial product, or strategy does not guarantee future results. Neither the RIA Firm nor the Advisor represent that the securities, cryptocurrencies, products, or services discussed in any of these materials or related websites are suitable for any particular investor. You are solely responsible for determining whether any investment, investment strategy, security, cryptocurrency, or related transaction is appropriate for you based on your personal investment objectives, financial circumstances and risk tolerance. You should consult your business advisor, attorney, or tax and accounting advisor regarding your specific business, legal or tax situation.

Any investments or strategies mentioned may not be suitable for all investors. Investors should consider the investment objectives, risks, and charges and expenses of any investment before investing. Investors are advised to consult with their financial and/or tax advisors and refer to any prospectus for any investment.

Copyright (c) 2025 Clearnomics, Inc. All rights reserved. The information contained herein has been obtained from sources believed to be reliable, but is not necessarily complete and its accuracy cannot be guaranteed. No representation or warranty, express or implied, is made as to the fairness, accuracy, completeness, or correctness of the information and opinions contained herein. The views and the other information provided are subject to change without notice. All reports posted on or via www.clearnomics.com or any affiliated websites, applications, or services are issued without regard to the specific investment objectives, financial situation, or particular needs of any specific recipient and are not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. Past performance is not necessarily a guide to future results. Company fundamentals and earnings may be mentioned occasionally, but should not be construed as a recommendation to buy, sell, or hold the company's stock. Predictions, forecasts, and estimates for any and all markets should not be construed as recommendations to buy, sell, or hold any security--including mutual funds, futures contracts, and exchange traded funds, or any similar instruments. The text, images, and other materials contained or displayed in this report are proprietary to Clearnomics, Inc. and constitute valuable intellectual property. All unauthorized reproduction or other use of material from Clearnomics, Inc. shall be deemed willful infringement(s) of this copyright and other proprietary and intellectual property rights, including but not limited to, rights of privacy. Clearnomics, Inc. expressly reserves all rights in connection with its intellectual property, including without limitation the right to block the transfer of its products and services and/or to track usage thereof, through electronic tracking technology, and all other lawful means, now known or hereafter devised. Clearnomics, Inc. reserves the right, without further notice, to pursue to the fullest extent allowed by the law any and all criminal and civil remedies for the violation of its rights.

The Role of Social Security in Financial Planning

2025-07-21

Social Security, one of the most important government programs for retirees, has evolved over its 90-year history. As the aging population grows, so too do concerns about whether Americans will be able to rely on benefits in retirement. While Social Security is important, it is only one part of a well-crafted financial plan. In this economic and political environment, it's important to understand all of the components of retirement planning to achieve long-term financial goals.

Whether you’re days or decades away from retirement, it’s never too early to understand how Social Security fits into your financial plan. To have perspective on the opportunities and risks, it's important to understand the program’s history, current challenges, and the strategies available to navigate what’s ahead.

A brief history of Social Security

Established in 1935 during the Great Depression under President Franklin D. Roosevelt, Social Security was designed as a social safety net for older Americans. What began as a program paying modest benefits to a relatively small group has evolved into a complex system that supports millions of retirees, disabled workers, and their families. Today, Social Security benefits represent a significant portion of retirement income for millions of Americans.

So, what are the challenges facing Social Security today? The program operates primarily on a pay-as-you-go system. This means that the payroll taxes of current workers are used to pay for current benefits. In other words, the payroll taxes you paid do not go toward your own benefits in the future, but toward a current beneficiary’s Social Security checks - much like any other insurance program.

This system worked well when the ratio of workers to beneficiaries was high, as they were throughout much of the 20th century. However, demographic shifts have meant there are fewer workers to fund the program even as there are more retirees seeking benefits. Specifically, in 1940, there were 42 workers for each retiree. Today, that ratio has fallen to around 2.8 workers per beneficiary, and is projected to decline further as the population ages and the birth rate continues to trend downward.

There have been many projections on when the Social Security trust funds will be depleted. The latest projection from the Social Security Board of Trustees estimates that reserves are sufficient until 2034, after which benefits would need to be reduced. At the moment, ongoing payroll taxes would still cover about 78% of scheduled benefits. While the exact timeline may shift, the underlying challenge remains consistent: without reforms, the trust funds may not be able to pay full scheduled benefits indefinitely.

Living longer is a blessing, but a challenge for the Social Security trust fund

The national debt and deficit also raise concerns about the sustainability of the program, with the debt nearing $37 trillion and the country running persistent deficits. Even though Social Security is considered “mandatory,” the pressure to cut government spending creates uncertainty around how Congress may change these programs in the future.

It’s no surprise that potential solutions are subject to intense political debate, making a near-term fix to Social Security unlikely. Some proposed ideas include raising the retirement ages for starting benefits or increasing or eliminating the taxable wage cap. Unfortunately, there are few long-term strategies to fix Social Security once and for all.

It can help to look to other developed nations that have faced similar demographic challenges. For example, several European countries including France and the UK have increased retirement ages to reduce strain on their systems. Australia has taken a different approach, with a “means-tested” calculation that only provides benefits to retirees under certain asset and income thresholds.

While the 2034 depletion date is still years away, the need for solutions will only rise in urgency. Complete elimination of benefits is highly unlikely, though the ongoing funding challenges for Social Security will likely mean that modifications have to be made.

Strategic Considerations for Retirement Planning

Turning to individual actions, prudent planning is necessary to stay on track toward retirement given this uncertainty around Social Security. What decisions make sense depend on your holistic financial plan, goals, tax considerations, and more.

Here are some important factors to consider:

Deciding to Delay

Retirement benefits can start as early as age 62; however, receiving benefits early reduces the monthly payment. Conversely, delaying benefits until age 70 can increase the monthly payment by approximately 8% per year beyond full retirement age (66-67, depending on birth year), according to the Social Security Administration.

A breakeven analysis can help determine if delaying is a worthwhile strategy. Generally, if you live beyond your early 80s, delaying benefits results in higher lifetime payments. However, this analysis changes if you account for the time value of money or opportunity costs.

Bridge Strategies

The value of delaying depends largely on what you do for income while waiting. Some retirees use portfolio withdrawals as a “bridge” to higher Social Security benefits later. This strategy can be particularly valuable for married couples, where maximizing the higher earner’s benefit creates a larger guaranteed survivor benefit.

Another bridge strategy may be to implement a "reverse mortgage" that provides a line of credit to draw on while delaying benefits from Social Security.

Tax Implications

Up to 85% of Social Security benefits may be taxable, depending on your combined income. Future tax law changes could potentially increase this percentage. Strategic withdrawal planning with the help of a trusted advisor can help minimize the tax impact of your benefits. Note that proceeds from a reserve mortgage are available tax free.

Conservative Assumptions

For those earlier in their careers, they have more time to prepare for retirement and more options to adjust for the uncertainty of Social Security.

Thus, younger workers may consider building retirement plans that don’t rely heavily on Social Security. This doesn’t mean ignoring it entirely, but rather treating potential benefits as a supplement to personal savings rather than a foundation.

For those closer to or in retirement, test your plan after applying a cut to your expected benefits. Review your spending assumptions to determine what items may be reduced or eliminated. If the Trustees are reporting that benefits may need to be cut 22%, what changes can you make to your spending or investing plan to fill in any projected gap?

Stay Informed of Policy Changes

Policy changes will likely occur before the trust fund depletion date. Staying informed about proposed reforms helps you adjust your planning accordingly. Possible changes include further increases to the full retirement age, adjustments to the benefit formula, or changes to payroll tax caps.

Maximize Tax-Advantaged Accounts

With Social Security’s future uncertain, maximizing contributions to 401(k)s, IRAs, and HSAs becomes even more important. These accounts provide tax advantages that can help compensate for potentially reduced government benefits.

The Future of Social Security Requires Careful Planning

Despite legitimate concerns, it’s important to maintain perspective. Social Security has faced funding challenges before, and political pressure to preserve the program remains strong.

The prudent approach is neither blind faith nor complete dismissal of Social Security’s role in retirement planning. Instead, investors should recognize the program’s importance while treating it as only one component of a diversified retirement strategy.

The bottom line? By understanding Social Security’s challenges, you can build a more resilient retirement strategy regardless of your current age or career stage.

What the "One Big Beautiful Bill" Means for Investors

2025-07-21

After months of negotiations, a new tax and spending bill was approved by Congress and signed into law by President Trump on July 4. This new budget is far-reaching, including making many parts of the Tax Cuts and Jobs Act permanent, raising state and local tax exemptions, extending the estate tax limits, and much more. It attempts to offset some of these provisions with spending cuts in key areas such as Medicaid and other social service programs.

This bill matters because, while trade policy has been at the forefront over the past several months, tax and spending policy in Washington has been a growing source of uncertainty for many years. While there is political disagreement with the direction of this new budget, it does take the possibility of a “tax cliff” off the table - a situation where tax policy could have changed dramatically if provisions expired at the end of this year. (That said, if you were working with a tax planner or financial advisor, you would have been expecting this change and possibly implemented strategies to mitigate the "cliff".)

On an individual level, taxes directly affect many aspects of financial planning, and the specific provisions in this tax bill have immediate implications for household finances. For example, changes in child or dependent credits will help families while a new Enhanced Senior Deduction or "Senior Bonus" up to $6,000 will help many who are on fixed incomes in retirement. From an economic perspective, many investors also worry about the level of government spending, the growing national debt, and other factors that have weighed on markets over the past two decades - all of which raise the concern of higher long-term interest rates for government, businesses, and households.

Thus, there are many angles from which to view the recently passed budget. What do investors need to know when it comes to their own financial plans and what it means for markets in the years to come?

The Tax Cuts and Jobs Act rates are now permanent

The new tax bill, dubbed the “One Big Beautiful Bill” by the administration, extends and expands several key aspects from the 2017 Tax Cuts and Jobs Act (TCJA) that were set to expire. It also introduces new measures that provide other benefits to taxpayers, which are only partially offset by spending cuts in other areas. Here are just some of the major provisions that may affect households:

Current TCJA tax rates and brackets are now permanent

.They were originally set to expire at the end of 2025.

The standard deduction increases to $15,750 for single filers and $31,500 for joint filers in 2025.
There is an additional $6,000 deduction for qualifying seniors (sometimes referred to as a “senior bonus”) that phases out for gross incomes exceeding $75,000 (single filer) or $150,000 (joint filers). The provision expires in 2028.
The alternative minimum tax exemption is now permanent. It also increases phaseout thresholds to $500,000 for single filers, which will be indexed for inflation in the future.
The child tax credit rises from $2,000 to $2,200 per child with future adjustments indexed to inflation to maintain purchasing power over time.
The state and local tax (SALT) deduction cap increases to $40,000 from a $10,000 limit with annual increases of 1% through 2029. It is then scheduled to revert back to $10,000 in 2030.
A deduction for tip income capped at $25,000 annually for workers earning less than $150,000, effective through 2028.
Some green energy tax credits are repealed including for electric vehicles and residential energy efficiency credits.
The federal debt limit increases by $5 trillion. This will prevent Congress from having to debate and approve debt limit increases for some time, reducing political uncertainty.
For businesses, the bill expands tax breaks designed to encourage domestic investment and job creation.

These and many other changes maintain the relatively low tax environment that has characterized the past several decades. As the accompanying chart shows, current tax rates remain well below the peaks experienced during much of the 20th century, when top marginal rates exceeded 70% and sometimes reached above 90% during wartime periods.

Growing concerns over fiscal deficits

Tax policy and government deficits are two sides of the same coin. This is because tax cuts reduce government revenues which then need to be offset by either lower spending or increased borrowing. However, most government spending is for entitlement and defense programs which are politically difficult to change. According to the Department of the Treasury, in 2025 21% of government spending is for Social Security, 14% for Medicare, 13% is for National Defense, and 14% is to pay interest costs on the existing national debt.

It's no surprise then that government borrowing has increased persistently over the past century and will likely continue to do so. The Congressional Budget Office, a non-partisan agency that supports Congress, estimates that this new tax and spending bill will add $3.4 trillion to the national debt over the next decade. This is against the backdrop of a federal debt that already exceeds 120% of GDP, or $36.2 trillion, which amounts to about $106,000 per American.

Unfortunately, there are no easy solutions to this challenge, especially because this is a contentious political topic. On the one hand, tax cuts can stimulate economic growth, which may help to offset revenue losses through increased economic activity - though this economic theory has not been consistently borne out by history. On the other hand, Washington has a poor track record of balancing budgets even when the economy is strong. The last balanced budgets occurred 25 years ago during the Clinton years, and about three decades before that during the Johnson administration.

It’s also important to remember that there has not always been an income tax in the United States. The modern income tax system began with the 16th Amendment in 1913 which applied modest rates to relatively few Americans. The system expanded dramatically during the Great Depression and World War II, with top rates reaching 94% by 1944 - though few actually paid these rates. The post-war period brought various reforms, including President Reagan’s Tax Reform Act of 1986 that simplified the tax code and lowered rates.

The situation has changed significantly in the intervening years. As the accompanying chart above shows, individual income taxes now represent the primary source of federal revenue. Social insurance taxes, also known as payroll taxes, are withheld from wages and help to pay for Social Security, Medicare, unemployment insurance, and other programs. Other sources of revenue are much smaller in proportion and include corporate taxes, which were reduced by the TCJA, and excise taxes, such as tariffs.

For investors, tax policies can certainly have direct implications on financial plans and portfolios. From a macroeconomic perspective, however, fiscal implications have more limited effects. Over longer periods, higher debt levels can influence interest rates and inflation expectations. While these factors have been relatively high in recent years, many of the worst-case scenarios have not yet occurred. The key for long-term investors is to maintain diversified portfolios that can perform across different fiscal and economic environments, rather than reacting to policy changes alone.

The bill continues the higher estate tax exemption limit

One set of provisions that would have been at the center of a tax cliff is the estate tax exemption. The TCJA doubled these limits which were scheduled to revert to previous levels this year. However, the passage of the new tax bill makes these higher exemptions permanent, further increasing the threshold to $15 million for individuals and $30 million for couples in 2026.

While it may seem like estate taxes only apply to higher net worth households, the reality is that all families must consider how assets can be passed to future generations. This requires a holistic approach that integrates estate planning, tax efficiency, philanthropy, and long-term family wealth preservation goals. It’s also important to keep in mind that individual states can also impose estate taxes with exemption thresholds that are less favorable than the federal level.

The bottom line? The new spending and tax bill extends and expands the current low-tax environment. For investors, a properly constructed financial plan is designed with these tax provisions in mind. When it comes to growing deficits and the national debt, it’s important to not react with our portfolios, but to maintain a longer-term perspective.

Steve's View ...

Regardless of the potential long-term macro impact of these various budget and tax moves on things like the deficit and future borrowing costs, individuals and their advisors have a responsibility to utilize whatever options tax law has afforded. In this case, investors need to consider implementing a regular Roth IRA conversion policy to reduce the impact of taxes on clients in retirement or on those who may inherit unused retirement assets. Tax rates continue to be at the lowest level in decades.

And if the markets become unsettled because of on-again/off-again trade or tariff policy, actual or perceived threats to central bank independence, or changes among Cabinet personnel, then take lemons and make lemonade. Rumors of such actions may result in market corrections. That's the ideal time to consider converting IRA positions to a Roth IRA.

Since Roth conversions will add to taxable income which may impact the cost of Medicare premiums, it's important to make tax projections before implementing any conversion strategy. Now's the time to reach out to review how taxes will affect your near-term and future plans.

New Market All-Time Highs: How Investors Can Stay Balanced

2025-06-30

President Dwight Eisenhower is often quoted as saying “what is important is seldom urgent and what is urgent is seldom important.” This perfectly captures the challenges many investors face, since it often feels as if every breaking market and economic development is urgent and requires immediate action. That has certainly been the case this year with tariffs, geopolitical conflicts, economic worries, and more on investors’ minds.

And yet, the most important investment decisions are not the urgent ones, but those made with patience and a long-term perspective. The impactful factors for building wealth such as staying disciplined, saving steadily, contributing to your portfolio regularly, and benefiting from compound growth, require planning and commitment rather than sudden changes to portfolios.

Despite a challenging start to the year, the stock market has now reached new record levels. The S&P 500 and the Nasdaq recently surpassed their previous peaks, with year-to-date returns of 5.1% and 5.0%, respectively, while the Dow is only 2.6% below its all-time high. This is the result of many parts of the market rebounding across styles, sectors, and asset classes.

While there are still market challenges ahead, this is a reminder that it has been more important to stick to long-term plans than react to every headline. In today's market environment, how can investors stay focused and invested?

The market has reached new all-time highs

First, it's important to understand that it is not unusual for the market to reach new highs. Since markets trend upward over long periods, bull markets spend much of their time at record highs. Of course, this does not mean the market only moves up in a straight line. It does, however, mean that those who can see through short-term market swings are better positioned to benefit from market trends.

The accompanying chart shows how frequently new highs occur during market cycles. From 2013, when the S&P 500 recovered from the 2008 financial crisis, to 2024, the average year experienced 37 new all-time highs based on daily close prices. This amounts to about 15% of all trading days – a statistic some may find surprising. Years such as 2017 and 2021 experienced many more. Last year, there were 57 record closing days for the market, a significant number given the many concerns investors faced such as recession fears and the presidential election.

This pattern occurs due to the market and business cycle. When the economy is expanding, the stock market tends to rise alongside it. Since the mid-20th century, these cycles have grown longer, with bull markets far exceeding bear markets in duration and returns, a fact that has benefited those who stick to their financial plans. Thus, new all-time highs are not necessarily, on their own, reasons to worry or a signal that the market is about to reverse.

A question that some investors may naturally have after markets reach new record highs is whether they should "wait for a pullback." While periodic declines are inevitable, attempting to time these movements can be counterproductive. In fact, the opportunity cost of waiting for the perfect entry point is often higher than simply getting invested in the first place.

Corporate bonds have performed well since the tariff pause

The positive momentum in stocks has been accompanied by similar strength in the bond market, especially for corporate bonds. Bonds are categorized by their credit quality, which is a measure of how likely it is for investors to be repaid. The interest rates on these bonds have fallen recently, both in absolute terms and compared to Treasury yields. This is often described as credit spreads “tightening,” which is positive for investors since it means the prices of these bonds are rising.

This occurs because when the economy is stable and the stock market is strong, there is greater confidence in the ability of companies to service their obligations. This is why there is often a positive correlation between the stock market and credit markets, since they mirror the same underlying drivers. When investors push stocks to record levels, corporate bond prices also tend to benefit from optimism about economic conditions and corporate health.

This has supported the Bloomberg U.S. Aggregate Bond Index, a diversified index of different U.S. bonds, with a 3.7% return so far this year. The corporate bond component of the index has also generated 3.7%, while high yield has outperformed with a 4.3% return.

Tightening credit spreads also suggest that the flight-to-safety that occurred earlier this year has largely faded for the time being. Lower credit spreads can also be positive for the underlying economy since they allow companies to raise funds, finance new projects, and roll over existing debt more easily.

For investors, this is a reminder that while the stock market receives the most attention, many other asset classes have supported portfolios this year as well. With the S&P 500 at record highs, it’s a great time to review your asset allocation and ensure that your financial plan is set up for all phases of the market cycle.

Asset allocation remains important despite strong performance

While the strength in both stocks and bonds is encouraging for investors, it also underscores the importance of maintaining disciplined portfolio management. Building a portfolio is not just about investment returns. Instead, what matters is the balance of risk and returns, and how each asset class contributes to this overall balance. Doing so properly, with an eye toward long-term financial goals, can ideally lead to a portfolio that supports investors across changing market environments.

Recent years have provided clear examples of how different asset classes can perform in varying market conditions. The accompanying chart highlights how different asset allocations perform over both good and bad periods

Those portfolios that are heavily invested in stocks may outperform when the market is expanding, but will also typically experience larger swings during downturns. Including bonds can make the ride smoother, which likely helps to ensure that financial goals are met. Which path makes the most sense depends on your particular risk tolerance and return objectives. Having a comprehensive view of your goals and financial needs allows you to tailor a portfolio to withstand the next period of volatility, when it inevitably occurs.

The bottom line? While the market has bounced back, investors should maintain disciplined portfolio management rather than chasing recent performance. History shows that staying invested through market cycles remains the best approach to achieving long-term financial goals.

5 Key Investor Insights for the Second Half of 2025

2025-06-23

On the surface, the first half of 2025 has been challenging for investors. From a trade war and market correction to an escalating Middle East conflict and concerns over the growing national debt, investors may feel as if financial markets are stumbling from one problem to the next like a drunken sailor on shore leave. Daily news headlines often present an endless stream of negativity, making the situation feel worse than it may be

However, as the old saying goes, it's important to never let a good crisis go to waste. While this phrase is often used in a political context, the principle applies equally well to long-term investing and financial planning. This is because diving beneath the headlines can often reveal important opportunities for investors. For instance, while the first half experienced market corrections for the S&P 500 and Dow, and a bear market for the Nasdaq, it also witnessed one of the fastest recoveries in history. Proof, once again, that trying to time the market may mean investors miss the upswing on any given day.

Taken together, this created an environment that rewarded those who focused on their asset allocations and maintained a broader perspective. While uncertainty is never pleasant, the reality is that risk and reward are opposite sides of the same coin. If it were easy to stay invested and see past the immediate headlines, everyone would do so, and future returns would potentially be less attractive.

It's important to keep these lessons in mind amid heightened uncertainty as we enter the second half of the year. Below, we explore five key insights that can help investors navigate these markets and position their portfolios for opportunities, regardless of the exact headlines in the coming months.

Markets are resilient as we begin the second half of the year

Investors have become accustomed to market swings over the past several years though this year seems different with the marked increase in volatility. This year has been no exception, with many investors worrying that we were entering an escalating trade war that could last years, resulting in a global recession.

While tariffs are still a concern across the economy, recent trade deals have made the worst-case scenarios less likely. As the accompanying chart highlights, markets performed significantly better in the second quarter than in the first for this reason.

Looking forward, markets will likely be sensitive to the next phase of trade agreements. The 90-day pauses for most countries will end in early July, and the reported deal with China has not yet fully materialized. It is quite possible that this 90-day pause may be renewed. In the past this has led to a bit of a relief bounce when a new pause is announced.

The administration has shown that its objective is to reach new deals, just as it did in 2018 and 2019. Regardless of the exact outcomes, the average level of tariffs on imported goods has risen significantly this year which could still impact consumer inflation and corporate profit margins.

Investors should keep all of this in mind in the second half of the year. While there is never a guarantee that markets will recover quickly, the key is to focus on the underlying trends. After all, markets are forward-looking and capable of adapting to changing conditions.

Geopolitical risks are dominating headlines today

Geopolitical risks have intensified, particularly with the escalation of the Israel-Iran conflict which now involves the U.S. military. This naturally creates worries for some investors since these headlines are unlike the normal business and economic news flow. Fortunately, history provides important perspectives on how markets typically respond to geopolitical events.

The accompanying chart shows that markets have generally recovered from geopolitical shocks over time, often within months of the initial disruption. Even significant events such as wars had limited long-term impact on well-diversified portfolios. This is not to minimize the human and societal costs of these conflicts, but to serve as
a reminder that making dramatic portfolio changes based on geopolitics is rarely productive.

Instead, what mattered more during these historical periods were the market and economic trends. For example, the Gulf War took place during a long 1990s bull market driven by information technology. In contrast, the war in Afghanistan began after the dot-com bust, and continued across multiple economic cycles.

Going back further in history, the American economy was still struggling from the Great Depression at the onset of World War II. The war effort kick-started industrial activity and propelled markets forward. The Vietnam War, on the other hand, coincided with a challenging period of stagflation.

The immediate market concern around the Iran conflict centers around oil supply disruptions. In this instance, the Strait of Hormuz to Iran’s south is a critical waterway through which over one-fifth of global oil is transported. Any disruption to oil production or critical supply paths could result in a jump in oil prices, fueling inflation.

Despite this, oil prices have stayed within a narrow range as the conflict has escalated. The price of Brent crude is only back to where it was as recently as January. So, while the situation is still evolving, it’s important to stay balanced when considering the impact of geopolitics. In fact, as of the first trading day after the US bombed nuclear facilities in Iran and Iran launched missiles at a US military base in the region, the markets have basically shrugged this off. What happens in the coming days is almost anyone's guess though it's fair to say that volatility will likely increase.

The economy appears healthy

Perhaps the most important bright spot over the past several years has been the resilience of the U.S. economy. What has surprised investors the most is the strength of the labor market even as inflation has fallen back toward more historically normal levels. The accompanying chart shows that most inflation measures are at or below 3%.

The latest GDP report did show that the economy shrank by 0.2% during the first three months of the year. However, the details also show that this was largely due to trade as companies stockpiled imported goods ahead of potential tariffs. Consumer spending, which represents the largest component of economic growth, continued to grow steadily, supporting the overall economy. Without the trade disruptions, GDP growth would likely have been positive.

Looking ahead, the longer-term unofficial GDPNow forecast from the Atlanta Fed is projecting 3.4% annualized growth by the end of the year which is down slightly from last week's projection of 3.5%. Stripping away inflation, this translates to real growth in the 1.4% neighborhood. Other projections from the international Office of Economic Cooperation and Development (OECD) are similar with projections of US growth in 2025 down to 1.6% adjusting for inflation. A lot of this is a result of the uncertain impact of US tariff policy on global economic growth.

One area of concern that will likely resurface in the second half of the year is the growing national debt due to persistent government spending and deficits. This prompted Moody’s to downgrade the U.S. debt in May, following similar actions from other ratings agencies including Standard & Poor’s in 2011 and Fitch in 2023. This will be at the forefront once more as Congress debates the next budget bill, including provisions from the extension of the Tax Cuts and Jobs Act.

The national debt presents serious long-term challenges to the country and economy, especially because there do not appear to be long-term solutions that are politically palatable. However, it’s once again important to not overreact with our portfolios. History shows that making portfolio decisions based on fiscal policy in Washington would have been counterproductive. Instead, these periods often present opportunities for investors across stocks and bonds.

Asset classes beyond U.S. stocks have performed well

The biggest challenge with the market rebound is that U.S. stock market valuations are once again on the expensive side. That said, the elevated valuation environment has created opportunities in other areas of the market. International stocks, small-cap companies, and value-oriented sectors often trade at more attractive multiples, providing potential sources of opportunity for patient investors. Bond markets also offer compelling opportunities, with yields remaining above long-term averages across most fixed income sectors. With the Fed announcing no changes in policy last week, the expectation is for rates to hold where they are while the Fed waits for clearer signals. At this point, the odds are leaning to one or possibly two rate cuts before the end of the year (down from the four predicted by many early on) depending on inflation. With no changes on the horizon, increasing bond allocations makes some sense now.

One of the most significant developments of 2025 has been the strong performance of international stocks, with developed and emerging markets experiencing double-digit gains, based on the MSCI EAFE and MSCI EM indices. This has partly been driven by a weakening U.S. dollar. When the dollar falls, assets denominated in foreign currencies become more valuable.

This serves as a reminder for the second half of the year that market leadership rotates over time. Maintaining exposure to different regions as well as different sectors and sizes of stocks as well as different types and maturities of bonds can both enhance portfolio outcomes and potentially help to reduce risk through diversification. While past performance doesn't guarantee future results, the current environment highlights why investors often benefit from patient, long-term approaches that capture opportunities across global markets.

The benefits of maintaining a long-term perspective

The patterns in the first half of the year are ones that investors have faced throughout history. They show that extending investment time horizons can improve portfolio outcomes, even when the market climate is the most challenging.

The accompanying chart shows that while annual returns can vary widely - with stocks ranging from significant losses to substantial gains in any given year - this volatility has historically smoothed out over longer periods. Over horizons of 10 years and more, the range of outcomes narrows substantially, which is why stocks and bonds have historically served as the foundations of long-term portfolios.

This historical perspective reinforces the importance of staying committed to well-constructed portfolios despite short-term concerns. This will only be more important as new developments test markets in the months to come.

The bottom line? The first half of 2025 underscores the need to stay focused on the long run. Investors who maintain discipline and focus on long-term principles are well-positioned to navigate the second half of the year and achieve their financial goals.

Expect continued uncertainty and volatility. While the near-term outlook based on headlines may seem upsetting, the longer-term, 12-month outlook remains positive because of continuing consumer demand, domestic manufacturing activity, solid corporate earnings, and reasonably good labor numbers.

The twelve-month view of multi-factor indicators is showing "Risk On." This environment favors mid-cap growth and select sectors such as consumer discretionary, financials, and industrials, and high yield or convertible credit. Risk On applies to areas worth considering for over-weight aside from a core diversified portfolio.

The Middle East Conflict: How Wars Impact Investors

2025-06-16

Recent global events have dominated the news cycle. Markets tend to factor in the possible adverse impacts when this happens. In the meantime, investors need to be aware of "headline risk," which can oftentimes be temporary, and keep it in context to the broader economic picture.

The conflict between Israel and Iran has captured global attention and created uncertainty in financial markets. Israeli strikes on Iranian nuclear facilities and military targets began on June 13 and quickly led to retaliatory attacks. While the situation is still evolving and can change quickly, there are now reports that Iran would be open to ending hostilities and resuming talks over its nuclear programs. This is occurring even as the Israel-Gaza war rages on, and regional conflicts continue in other parts of the world.

While the humanitarian consequences are the most important consideration, it's also necessary for investors to understand how such events impact markets. Perhaps the biggest concern among investors is whether events like these could escalate into full-scale global wars. While this is always possible, recent history does not point in this direction. Instead, even serious conflicts, including Russia’s invasion of Ukraine and Hamas’s attack on Israel, remained contained, leading only to short-term stock market volatility.

This is not to diminish the severity of these conflicts, but to remind ourselves that overreacting to these events with our portfolios can be counterproductive. In times like these, it’s more important than ever to maintain perspective and focus on the lessons of history and long-term market trends. What should investors focus on in this environment to stay disciplined in these markets?

The latest developments mark an escalation between Israel and Iran. Israeli forces targeted Iranian nuclear sites and military leadership, with reports indicating damage to uranium conversion facilities. In turn, Iran has responded with missile and drone attacks, with some reaching Israeli territory. The conflict has also damaged critical infrastructure on both sides, including natural gas facilities and oil refineries.

At the risk of oversimplifying, historians tend to view every event as unique, with its own narrative, causes, and consequences. Economists, on the other hand, tend to look for patterns and similarities between events to draw broad conclusions. As investors, both perspectives are important in order to understand what lessons do and do not apply. After all, a common saying is that history doesn’t repeat itself, but it often rhymes.

The accompanying chart provides some historical perspective around geopolitical events over the past 25 years. This includes conflicts in the Middle East that impacted oil prices, such as the Iranian drone strikes against Saudi Arabia in 2019. These periods show that while there can be market swings in the short term, markets have typically recovered from geopolitical shocks, often within weeks or months of the initial event. What mattered more during these periods were the underlying business cycle trends.

Oil prices have been volatile

In the short run, oil prices can act as a transmission mechanism by which regional conflicts impact the rest of the world. The immediate market reaction to the latest conflict focused on energy markets, with Brent crude futures rising above $74 per barrel. Oil prices remain volatile but fell back toward $70 per barrel on a possible de-escalation.

Oil prices affect the global economy since they are still a significant input into all products and services. Higher oil prices lead to more expensive gasoline and transportation costs, raising prices for everyday consumers and businesses. This is compounded by the possible closure of important shipping lanes, including the Strait of Hormuz in the Persian Gulf. This strait is a critical waterway through which approximately one-third of the world's oil supply passes.

Still, it's important to maintain perspective on current oil price levels. While recent swings are notable, prices remain well below the peaks reached in 2022 during the early stages of the Russia-Ukraine conflict, when oil exceeded $120 per barrel. The current price level around $70 is within the range experienced over the past few years. Just this year alone, oil prices have fluctuated between $60 and $82 per barrel.

It's also important to note that the U.S. has grown increasingly energy independent over the past two decades. American oil production now exceeds 13.5 million barrels per day. Some may find it surprising that the U.S. is the world’s largest producer of both oil and natural gas. While the U.S. still requires foreign oil and is sensitive to global oil prices, the fact that there is a significant domestic supply helps to insulate the U.S. economy and financial markets.

The impact of wars on portfolios depends on business cycles

For investors worried about escalating conflicts around the world, zooming out can help provide perspective. From World War II to the Iraq War, markets may have reacted to these conflicts in the short run, but were driven by investment fundamentals in the long run.

For example, World War II jump-started industrial production after the Great Depression, and led to a significant shift in the labor market with women entering the workforce. These factors helped propel the economy through the rest of the century. Similarly, the Gulf War affected oil prices, but also coincided with the Information Technology revolution of the 1990s. In contrast, the decade following the Vietnam War coincided with high oil prices and stagflation, resulting in poor market performance.

Again, none of this is to trivialize the humanitarian and societal consequences of these wars. For the current situation, much will depend on whether the conflict expands further or begins to de-escalate. The involvement of major powers and threats to critical supply routes add complexity, but history suggests that even significant regional conflicts tend to have limited long-term impact on global financial markets.

The bottom line? While Middle East tensions have created short-term market volatility, investors should maintain perspective and avoid overreacting to headlines. A portfolio aligned with long-term financial goals remains the best approach for navigating periods of geopolitical uncertainty.

Steve's Portfolio View

Up until this past week's news out of the Middle East, markets generally rebounded back to near all-time highs in the S&P 500. Large-Cap growth and technology stocks powered returns with both the Nasdaq 100 and Russell 1000 Growth indices outpacing the S&P 500. Changing trade policy is the driving force behind a lot of this action. As tariff pauses have been put into place, investor and consumer sentiment has improved and has been reflected in stock prices. Where things go from here will depend a lot on how things play out on the geo-political stage as well as with trade policy. Strong earnings data like we've had in Q1 can easily be swamped by "exogenous shocks" like when missiles fall out of the sky.

The recent selloffs and rebounds in markets are nothing new. They do reinforce a key investment principle: Discipline and a well-diversified portfolio are your best defenses against making poorly timed, emotional decisions to exit and re-enter the markets.

Since uncertainty over trade, immigration, fiscal, and tax policies coupled with the ongoing potential for other geo-political risks will not likely abate any time soon, uncertainty and continued volatility are the only things that can be certain.

This reinforces the need for diversification.

Current Market Themes

In this environment, it's likely best to overweight large-cap US growth stocks and underweight value stocks relative to the allocation appropriate for an individual investor's risk profile. Including a healthy dose of international stocks despite recent headlines still makes sense. Tactically, investor allocations should emphasize the "dividend" and "quality" factors.

Likewise, investors are advised to overweight investment grade bonds mainly through US Treasuries and underweight high yield bonds.

Core investments can include:

Vanguard Total Bond Market mutual fund (VBTLX) or Vanguard Total Bond Market ETF (BND) which may be combined with Vanguard Intermediate Term Corporate Bond ETF (VCIT)
Vanguard European Stock Admiral shares mutual fund (VEUSX) or Vanguard FTSE Developed Markets ETF (VEA) or Vanguard Total International Stock Index with emerging market exposure (VTIAX)
Vanguard Total Stock Market Index Admiral shares mutual fund (VTSAX) or Vanguard Total Stock Market ETF (VTI)
Vanguard Dividend Appreciation Index Admiral shares mutual fund (VDADX) or Vanguard Dividend Appreciation ETF (VIG)

Corporate Earnings Off to a Solid Start in 2025

2025-06-15

The stock market’s performance is a function of two variables: earnings and valuations. A company generates profits, and investors assign a multiple to those profits, such as 15x or 20x earnings, to determine the company’s valuation. This year, earnings have been in the spotlight as policy uncertainty around tariffs and global trade clouds the outlook. With Q2 earnings season starting in mid-July, it’s a good time to see how companies performed in Q1. While businesses and economists warned about rising input costs, disrupted supply chains, and slower economic growth, actual Q1 results suggest the impact was limited so far. Figure 1 graphs the S&P 500’s trailing 12-month earnings growth from 2001 through May 2025, which is calculated as the index’s earnings over the last 12 months divided by earnings from the prior 12 months. It shows S&P 500 earnings grew by +10% in Q1, with corporate America continuing to deliver solid results.

The table in Figure 2 compares Q1 2025 earnings for each S&P 500 sector against Q1 2024 results. Year-over-year comparisons strip out the impact of seasonal effects, such as winter weather and holiday spending, and provide a clearer view of underlying trends. The first column shows Wall Street’s forecasted earnings growth as of March 31st, the second column shows reported results, and the third column shows the difference. The bottom line shows S&P 500 earnings grew +13% compared to the same quarter a year ago, exceeding expectations by nearly +6%.

Looking further up the table, the data shows every S&P 500 sector reported actual results that beat the estimate at the end of Q1. Much of the S&P 500’s earnings strength came from large technology firms, particularly those involved in artificial intelligence, which continue to benefit from strong demand. However, the positive surprises weren’t limited to the technology sector, with the industrials, health care, financials, and materials sectors also beating expectations. The strong performance across sectors highlights the resilience of corporate profits in Q1 despite policy uncertainty and concerns about slowing economic growth.

The outlook for the rest of 2025 is unclear. While tariff pauses and de-escalation have eased near-term pressure, many companies remain cautious due to unresolved policy risks tied to global trade. Earnings guidance has been more conservative, with management teams flagging rising input costs and reduced visibility into future demand. It’s also important to note that Q1 earnings results reflect activity from January through March, before widespread tariffs were announced in early April. Those increased tariffs could have a delayed impact on input costs and profit margins later this year. In summary, Q1 was a solid start, but future earnings will depend on companies’ ability to navigate a complex economic and policy environment.

Important Disclosures

The information and opinions provided herein are provided as general market commentary only and are subject to change at any time without notice. This commentary may contain forward-looking statements that are subject to various risks and uncertainties. None of the events or outcomes mentioned here may come to pass, and actual results may differ materially from those expressed or implied in these statements. No mention of a particular security, index, or other instrument in this report constitutes a recommendation to buy, sell, or hold that or any other security, nor does it constitute an opinion on the suitability of any security or index. The report is strictly an informational publication and has been prepared without regard to the particular investments and circumstances of the recipient.

Past performance does not guarantee or indicate future results. Any index performance mentioned is for illustrative purposes only and does not reflect any management fees, transaction costs, or expenses. Indexes are unmanaged, and one cannot invest directly in an index. Index performance does not represent the actual performance that would be achieved by investing in a fund.

Reflecting on the YTD Market Volatility & Recovery

2025-06-15

Monthly Market Summary

The S&P 500 Index returned +6.3%, its strongest 1-month return since November 2023. Large Cap Growth stocks led the rally, with the Nasdaq 100 and Russell 1000 Growth gaining +9.2% and +8.9%, respectively.
Technology was the top-performing S&P 500 sector for a second consecutive month, with the Industrials and Consumer Discretionary sectors also gaining over +8%. Health Care was the only sector to trade lower, and defensive sectors were relative underperformers as the market traded higher.
Bonds ended the month with a slight loss, with the U.S. Bond Aggregate posting a -0.6% total return. Corporate bonds outperformed as credit spreads tightened, with investment-grade posting a +0.2% total return and high-yield returning +1.7%.
International stocks traded higher but underperformed the S&P 500. Developed Markets gained +4.8%, while Emerging Markets returned +4.0%.

Markets Back Near All-Time Highs, But Forward Visibility Remains Low

The defining story of 2025 has been changing trade policy. Markets have weathered two months of policy-driven volatility, only to end up roughly where they started. After a nearly 20% decline from late February to early April, the S&P 500 has rebounded and is within 4% of its all-time high. What remains is weakened business and consumer confidence, rising inflation expectations, and a Federal Reserve that has paused interest rate cuts. The threat of a full-scale trade war and global supply chain disruption has diminished, but the full impact of recent events may take months to become known. Early economic data suggests the tariffs have had a limited impact, but we will continue monitoring what happens to economic and earnings growth in the coming quarters.

To date, the administration has introduced multiple 90-day tariff pauses. The pauses are temporary and staggered: the pause for most countries runs through early July, while the agreement with China extends through mid-August. A recent court ruling adds a layer of uncertainty by challenging the administration’s authority to impose tariffs, although the decision is under appeal. The U.S. economy entered the year with solid momentum, and current market conditions suggest investors are pricing in only a modest impact from tariffs. With policy details still emerging, markets are likely to remain sensitive to new developments, which could mean continued volatility over the coming months.

Looking Ahead: Navigating Uncertainty with a Steady Plan

What is most notable about this period is how quickly sentiment can change. Markets are forward-looking, which means they price in not only current conditions but also future expectations. This helps explain why the market can rally when data is weak and selloff despite strong earnings and economic growth. The stock market’s sharp decline and quick rebound is a reminder of the importance of maintaining a long-term perspective. Periods like this reinforce several important investment principles. Staying invested can help avoid the costly mistakes of poorly timed exits and re-entries. Emotional discipline and a well-diversified portfolio are your best defenses against making reactive decisions during market volatility. With the potential for more volatility, it’s important to focus on what you can control—diversification, discipline, and sticking to your long-term plan.

Important Disclosures

How a Weakening Dollar Affects Long-Term Investors

2025-06-09

For many Americans, the status of the U.S. dollar reflects the country’s position in the world. However, the dollar has weakened in recent months amid trade and economic uncertainty, declining against a basket of major currencies to its lowest level in three years. This has renewed concerns that the dollar could lose its place in the global financial system.

For investors, understanding the dollar's role in global markets and the forces that influence it remains important for portfolio positioning. What factors are driving these recent currency moves, and how might they affect the dollar's long-term prospects?

Historical perspective on the dollar

The U.S. dollar has served as the world's primary reserve currency for the past century, since it overtook the British pound after World War I. Some investors worry that geopolitics, fiscal challenges such as the national debt, trade policies, or emerging alternatives such as the renminbi or cryptocurrencies could threaten this status.

While these are real concerns, it’s important to understand that these worries are not new and tend to resurface during periods of economic uncertainty. In the 1980s, Japan's economic boom led to speculation that the yen might challenge the dollar. The introduction of the euro in the 2000s, along with China's economic rise, sparked similar predictions. More recently, the emergence of cryptocurrencies has prompted questions about the future of traditional currencies like the dollar.

Despite these fears, the dollar has maintained its central role in global finance through many economic cycles. This resilience reflects the depth and liquidity of U.S. financial markets, the relative stability of American institutions, and the dollar's continued use in international trade and investment. In general, the dollar continues to be viewed as a safe-haven asset during times of global economic crisis.

When it comes to our daily lives, it’s natural to view a strong dollar as always being positive. For consumers, a strong dollar makes traveling abroad more affordable and lowers the cost of imported goods, potentially reducing consumer inflation. So, when it comes to buying foreign goods and services, having a strong currency helps.

However, there are negatives to a strong dollar as well, especially when it comes to selling our goods and services. A strong dollar can make U.S. businesses less competitive since their products become more expensive for overseas buyers, potentially hurting American manufacturers and farmers. This is why many countries are often accused of keeping their currencies artificially low in order to boost their exports.

It’s easy to see that the ideal currency level depends on a balance of factors and isn’t just about strength or weakness.

Many factors drive the value of the dollar

There are many ways countries can manage their currencies. Some, like the United States and the United Kingdom, allow their currencies to float freely, with exchange rates determined primarily by market forces. Others maintain fixed exchange rates by pegging their currency to another major currency, such as the U.S. dollar or euro, or keep the value within a range. This requires central bank intervention and is not always easy to maintain.

An important driver of currency values is international trade. When foreign investors purchase U.S. goods and services, they must first exchange their currency for dollars. All things being equal, this demand for a currency creates upward pressure on the currency, raising its value relative to other currencies. The opposite is true when Americans import more than we export: the dollar is sold for foreign currencies.

In a perfect world, trade between nations would balance.Oftentimes, one nation imports more from others resulting in a "trade imbalance" leading to a "trade deficit" by the importing nation and vice versa. But we don't live in a perfect world.

This is why a persistent trade deficit would normally lead to a weaker currency. As US consumers have imported more from overseas sources, we have had to trade in our dollars to purchase other currencies resulting in a higher supply of US dollars on the market. Following the laws of supply and demand, the price (value) of dollars has fallen (or depreciated). Over the past twelve months, the U.S. imported $1 trillion more than it exported, as seen in the accompanying chart. This trade imbalance has persisted for many years, partly because there is significant demand for dollars by central banks and foreign businesses.

Interestingly, recent tariffs have not resulted in a stronger dollar. Economic theory would normally suggest that U.S. tariffs on foreign goods would reduce imports, thus putting upward pressure on the dollar. However, not only did many companies stockpile foreign goods ahead of these tariffs, but other factors such as capital flows and political uncertainty impact the currency as well.

Trade represents only one component of the broader currency equation. Capital flows, interest rates, central bank policies, and international lending all contribute to global dollar demand. The complexity of these interactions explains why currency movements often seem disconnected from simple economic indicators.

For example, differences in interest rates are among the most important factors that influence currency values. When the Federal Reserve sets rates higher than other major central banks, it typically creates demand for dollars, since investors could shift their assets to higher-yielding Treasuries.In financial markets, this is known as a “carry trade.” This demand, in turn, will lead to an appreciation of the dollar compared to other currencies resulting in the ability to buy more imported goods and services which will contribute to the trade deficit.

Additionally, concerns about fiscal policy may also be weighing on the dollar. With the national debt approaching 120% of GDP and persistent budget deficits, some investors worry about the long-term sustainability of U.S. fiscal policy. Investors are concerned that such persistent deficits will require more bond issuance. To counter the increased supply of US Treasuries that would be issued, expectations are that investors will demand higher interest rates to compensate for the risk. While these concerns have not reached crisis levels per se, they add another layer of complexity when valuing the U.S. dollar.

The dollar has maintained its global role

Given the many factors that influence its value, some perspective is needed when judging the current level of the dollar. While the dollar has declined to its lowest level in three years, zooming out shows that these levels are still near their strongest over the past twenty years. As always, it’s important to maintain a broader perspective and not overreact to recent moves.

For investors, a somewhat weaker dollar has been positive this year for diversified portfolios. A falling dollar means that international investments are worth even more when converted back from their local currencies, boosting returns. The accompanying chart shows that the MSCI EAFE index of developed market stocks and the MSCI EM index of emerging market stocks have outperformed the S&P 500 this year.

The bottom line? Despite many legitimate concerns, the dollar continues to serve as the world’s reserve currency. Perhaps more importantly, it has helped to boost diversified portfolios this year. Investors should continue to maintain a long-term perspective on the dollar.

Steve's Portfolio View ...

With ongoing uncertainty regarding tariff, tax, and budget policy, the general outlook remains cloudy over the near term (three- to 6 months). While the consensus among many investment analysts is for two Fed cuts in the second half of 2025, much will depend on actual data from the impact of tariffs along with the impact of reductions in government spending in certain areas and federal employment.

Labor markets remain resilient though growth has been limited to a small slice of the market (hospitality and services mainly). Inflation expectations seem to have eased though actual inflation is still running hotter than the Fed's target. Recent forecasts by the Atlanta Federal Reserve indicate a 3.8% expansion in GDP for the second half of 2025. Clearly, this forecast coupled with fairly stable employment readings is not one of imminent recession. Cutting rates now would seem to be adding fuel to the fire and lead to accelerating inflation. In turn, this would not bode well for longer-duration bonds over time though it might help with lowering the trade deficit as imports become more expensive with an eventual rise in interest rates.

Current Market Themes

In this environment, it's likely best to overweight large-cap US growth stocks and underweight value stocks relative to the allocation appropriate for an individual investor's risk profile. Tactically, investor allocations should emphasize the "dividend" and "quality" factors.

Likewise, investors are advised to overweight investment grade bonds mainly through US Treasuries and underweight high yield bonds. For more detail, refer to the Market Desk Investment Analysis section of the Smart Money Insights & Blog of the CVWA LLC website.

For "Global Core" investors, the following are recommended general ranges of allocations:

Moderately Conservative: 18% - 25% US Stock / 10% - 15% International Stock / 65% - 75% Bonds / Cash 0% - 10%
Moderate/Balanced: 32% - 45% US Stock / 15% - 30% International Stock / 30% - 45% Bonds / Cash 0% - 10%
Moderate Growth: 35% - 50% US Stock / 22% - 35% International Stock / 25% - 35% Bonds / Cash 0% -10%

Core investments can include:

Vanguard Total Bond Market mutual fund (VBTLX) or Vanguard Total Bond Market ETF (BND) which may be combined with Vanguard Intermediate Term Corporate Bond ETF (VCIT)
Vanguard European Stock Admiral shares mutual fund (VEUSX) or Vanguard FTSE Developed Markets ETF (VEA) or Vanguard Total International Stock Index with emerging market exposure (VTIAX)
Vanguard Total Stock Market Index Admiral shares mutual fund (VTSAX) or Vanguard Total Stock Market ETF (VTI)
Vanguard Dividend Appreciation Index Admiral shares mutual fund (VDADX) or Vanguard Dividend Appreciation ETF (VIG)

These allocations apply to the core holdings. Investors may want to keep cash set aside for future investing as "dry powder." Additional cash reserves needed for living expenses or as an emergency reserve are not part of these model allocations. A reasonably good option for cash is the Vanguard Cash Reserve Federal Money Market (VMRXX) with an approximate yield of 4.7% (as of 6/06/2025).

Making Sense of the Tariff Announcement

2025-04-04

Trump Administration Introduces New Tariff Measures

On April 2nd, the Trump administration unveiled a sweeping set of tariffs. A baseline 10% tariff applies to all imports from all countries unless specific exemptions are granted. Additional “reciprocal tariffs” target approximately 60 countries deemed the worst offenders, based on existing tariffs on U.S. goods, perceived trade barriers like currency manipulation, and subsidies to domestic industries. Figure 1 graphs the combined baseline plus reciprocal tariff rates across key countries. The rates range from 46% in Vietnam to 20% in the EU and span multiple regions, from Southeast Asia to China and Europe.

A History Lesson on U.S. Tariffs Over the Past Century

Tariffs are back in the spotlight, but they’ve been part of U.S. policy for over a century. Figure 2 graphs the average tariff rate on U.S. imports since 1891, calculated as the total amount of duties collected divided by the total value of imports. In 1899, the average tariff rate was 29%, a time when the U.S. relied heavily on tariffs for federal revenue and to protect domestic industries. Over time, tariff rates declined due to the rise of globalization and a shift from protectionism to more open and free trade. In recent years, the average rate was between 1% and 3%. However, the newly announced tariffs represent a turning point. The Yale Budget Lab estimates the average tariff rate will rise from less than 3% in 2024 to over 20%, the steepest level in nearly a century.

The Uncertain Impact of Tariffs on a Complex Global Economy

The new tariffs carry significant implications for financial markets and the economy, but their impact is difficult to predict given the complexity of global trade and the range of potential responses by countries. The timeline is also uncertain, and tariffs could remain in effect for weeks or years, depending on negotiations. Countries could retaliate with tariffs, leading to a global trade war. Economic effects like higher inflation and slower growth are possible but also uncertain. The new tariffs are only a few days old, and their impact will unfold gradually over months as supply chains adjust. In the near term, economists expect businesses to absorb some tariff costs, softening the impact. However, there is little consensus about how much they will absorb or how they will respond, such as pausing investment or holding back on hiring.

Focus On What You Can Control: Staying Disciplined with Your Long-Term Goals

The impact of today’s tariffs is uncertain, but history shows the economy and market usually adapt to changing environments. Rather than reacting to headlines and market volatility, the best course of action is to stay focused on your financial plan, maintain a well-diversified portfolio, and make decisions in line with your long-term goals.

Important Disclosures